The latest news on the Senate's financial reform negotiations is that the Obama team is prepared to concede both an independent Consumer Financial Protection Agency and statutory prohibitions on bank size and scope in order to quickly pass a regulatory reform bill. It's pretty much the scenario I predicted yesterday.The White House, at least, hasn't entirely given up on the CFPA. The status quo proposal reported yesterday by Steven Pearlstein -- keeping consumer regulation in the same agency as prudential -- has taken a back seat to creating an independent office within Treasury. This idea isn't all that bad. It's possible to ensure that an agency inside a department is effective -- the Office of Comptroller of Currency in Treasury certainly managed to use its independence to cause a lot of trouble, and the Food and Drug Administration, which is within the Health and Human Services Department, has a pretty solid record.
But it does look like everyone involved is open to returning to the Kanjorski amendment version of the Volcker rule. For those watching at home, the former gives regulators the authority to limit the scope and size of banks, and the latter decides those limits by statute. The Kanjorski amendment would actually be more powerful than the Volcker rule if regulators are willing to deploy its authorities, but whether they would is more than an open question, so reformers generally prefer the mandatory Volcker formulation.
What's weird about the Washington Post article is that the reason for these compromises remain unclear -- "senate leaders" have certain preferences, and Republicans "could" filibuster. But will they? I'm not so sure. Indeed, the article even recognizes that financial sector leaders, tired of the uncertainty around the bill, are now hoping to pass it quickly. If that's the case, then this it he time to press for a strong bill, not not offer compromises. The administration still has a lot of leverage on this front, and it needs to identify who it is compromising with -- who thinks we need to maintain the status quo instead of pursuing reform. The best route to a good bill, in my view, is a partisan one.
-- Tim Fernholz
